A Step in the Right Direction: Hope for Pension Reform
China Times editorial (Taipei, Taiwan, ROC)
January 31, 2013
Summary: Yesterday President Ma held a press conference at the presidential
palace. He invited Premier Sean Chen, Legislative Yuan Speaker Wang
Jin-pyng, Examination Yuan President Kuan Chung, and others. He
explained the general outlines of the government's pension reform
program. Everyone has high hopes for the pension reform express train.
He gave the order to begin implementation.
Full text below:
Yesterday President Ma held a press conference at the presidential palace. He invited Premier Sean Chen, Legislative Yuan Speaker Wang Jin-pyng, Examination Yuan President Kuan Chung, and others. He explained the general outlines of the government's pension reform program. Everyone has high hopes for the pension reform express train. He gave the order to begin implementation.
Many people are concerned about the details of the pension reform program. Who will be affected? How large will the impact be? This reaction is perfectly natural. But we are more concerned about the how. Compared to other policy making fiascoes over the past six months, this reform was carried out in a remarkably deft manner.
First of all, this reform was not the product of a handful of civil servants gathered in a conference room. Before the first phase was announced yesterday, the Executive held 124 seminars. As we understand it, even after yesterday's announcement, the government continued holding seminars eliciting the views of the public.
Some people are criticizing the first phase of the pension reform program. They are saying it includes no details. They are even implying that the lack of details means a lack of commitment to reform. Such criticism is worse than unfair. It is misleading. This phase is only supposed to indicate a general direction. Many details must await the next gathering, when they solicit the views of all parties. Only when a consensus forms, will the program be made into law. This is the correct procedure. The reason is simple. This reform is important. It cannot be a decision arrived at by a handful of officials, then rammed down everyones' throats. Major policy reforms must be submitted to everyone in advance, in order to solicit their opinions.
We hope the seminars held between now and April will invite reform groups or their representatives. We hope there will be close coordination. We hope that once the agencies in charge hear these opinions, they will not dig in their heels, but instead make any needed changes.
Secondly, regarding labor insurance, we applaud the government for not treating the outsourced actuarial report, which provoked public panic, as gospel. This newspaper has mentioned this before on its editorial page. The conclusion of the actuarial report is based on numerous assumptions. The most significant were interest rate assumptions. When interest rates were low, the assumption was that interest rates would always be low. But this was overly pessimistic.
Based on assumptions of low interest rates, the labor insurance actuarial report's target rate was 27.8%. But a preliminary version of the Executive Yuan's pension reform plan sets the ceiling at 19.5%. This is a far more reasonable figure than 27.8%. We applaud the Executive Yuan's professional and unhurried attitude.
We hope that during the coming months coordination continues, and that details of the policy will continue to emerge. We hope the Examination Yuan, which is responsible for the Public Service Pension, has the same understanding, and makes sound decisions. The outsourced actuarial report included hidden liabilities within the 18% preferential interest rate. It made long term discount rate assumptions for the next three to five decades. It used the average yield of 1.8% for 20 year government bonds in 2011. But who can say that the interest rate will be that low for the next three to five decades? For example, U.S. 10-year government bond yields over the past 50 years has been an average of 6.5%. That is much higher than this number.
Currently interest rates are low. Using ultra low discount rates to estimate future government liabilities, will lead to number inflation. The calculated financial risk will be exaggerated. Using these figures to make decisions is premature. This is also true for the Public Service Pension Fund actuarial report, and premium rates in the civil servants and public school teachers actuarial report. The ROI for the next three to five decades is set at 3.5%. This estimate is probably low. We hope the Executive Yuan will consider the views of all parties, and arrive at a sound decision.
We would like to say something on behalf of the government regarding pension reform for civil servants and public school teachers. After the Ma administration took office, it made five changes. These are changes that the opposition DPP boasted it would implement for several decades. But during its rule it implemented almost nothing. This includes the 2010 civil service retirement system, which was changed from the "75 system" to the "85 system." This includes setting a ceiling on the retirement income replacement rate for civil servants. This includes the January 2010 cancellation of tax exemptions for primary and secondary school teachers and military personnel. This includes lowering the ceiling for political appointees preferential savings from 3.3 million to 2.2 million. This includes last year's cancellation of most military and government retirees condolence payments.
This experience, along with labor insurance reform, provide a ray of hope for the social security system. There is only one fly in the ointment. The government has not indicated how it intends to cope with the declining birthrate. It has not offered an incentive program to encourage childbirth. Such a program is urgently needed. The falling birth rate must be slowed. Doing so would help solve social security's structural problem. We hope the government will tackle this problem as soon as possible, in its next wave of plans.